This chapter is from Legal Aspects of Doing Business in North America. Juris Publishing, Inc Utah

Transcription

1 This chapter is from Legal Aspects of Doing Business in North America. Juris Publishing, Inc Utah Introduction... UT-1 Establishment of Enterprises... UT-1 Organizational Structures... UT-1 Corporation... UT-1 Limited-Liability Companies... UT-9 Acquisition of Enterprises... UT-14 Forms of Acquisition... UT-14 Asset and Equity Acquisitions... UT-14 Mergers... UT-15 Dissenters Rights... UT-20 Acquisition of Realty... UT-21 Acquisition Procedure... UT-21 Real Estate Purchase Contracts... UT-21 Closing Preparations... UT-22 Closing and Acquisition of Title... UT-25 Taxation... UT-26 Types of Taxes... UT-26 Individual Income Tax... UT-27 Corporate Franchise Tax and Income Tax... UT-27 Pass-Through Entities... UT-28 Property Tax... UT-28 Withholding Tax... UT-29 Sales and Use Taxes... UT-29 Bankruptcy... UT-31 Securities... UT-32 In General... UT-32 Corporate Finance and Securities Registration Requirements... UT-33 Exemptions from Utah Registration Requirements... UT-36 Federal Covered Securities... UT-39 Currency Regulation, Capital and Profit Transfer, and Investment Incentives... UT-39 Competition Law... UT-40 Legislative Framework... UT-40 Utah Antitrust Act... UT-40 Specialized Price Discrimination Laws... UT-41 Utah Unfair Practices Act... UT-41

2 Utah Unfair Competition Act... UT-42 Utah Consumer Sales Practices Act... UT-42 Intellectual Property Protection... UT-43 Applicable Legislation... UT-43 Trade Marks and Service Marks... UT-43 Trade Secrets... UT-45 Employment Inventions... UT-46 Employment Law... UT-47 Applicable Legislation... UT-47 Utah Antidiscrimination Act... UT-47 New Hire Reporting... UT-47 Wages... UT-48 Child Labor Laws... UT-49 Utah Occupational Safety and Health Act... UT-49 Utah s Worker s Compensation Act... UT-50 Utah Employment Security Act... UT-50 Investment Financing... UT-50

3 Utah Cortland P. Andrews Snell & Wilmer LLP Salt Lake City, Utah, United States Introduction As with all jurisdictions within the United States, certain laws, regulations, and other legal requirements must be met to start, operate, and maintain a successful business in Utah. This chapter discusses, among other things, information and instructions on how to start a business, regulations that need to be complied with, and sources of assistance. Establishment of Enterprises Organizational Structures Business activity in Utah may be conducted through a variety of permitted organizational structures. Utah law specifically permits the following business organization structures: Sole proprietorship; General partnership; Limited partnership; Corporation; Professional corporation; Non-profit corporation; and Limited liability company. Corporation In General A corporation is a legal person and a legal entity that is separate and distinct from its owners (called shareholders) and its managers (called the board of directors). Its life is unaffected by the retirement or death of its shareholders, officers, and directors. A corporation is a person under the Constitution of the United States, and like natural persons, it is protected from unreasonable

4 UT-2 LEGAL ASPECTS OF DOING BUSINESS IN NORTH AMERICA searches and seizures and is guaranteed due process and equal protection under the law. It also has free speech rights. A corporation has its own domicile and its own place of residence, which locations determine, in part, whether a state may constitutionally impose its laws on the corporation. Chapter 10a of Title 16 of the Utah Code Annotated, referred to as the Utah Revised Business Corporation Act, governs all issues concerning corporations in Utah. Formation A corporation is only created by permission of the State of Utah by filing articles of incorporation with the Utah Department of Commerce, Division of Corporations and Commercial Code. At a minimum, the articles of incorporation must include: The name of the corporation; The purpose or purposes for which the corporation is formed (which may include any lawful activity for which a corporation may be formed); The number of shares the corporation is authorized to issue (if more than once class of shares is authorized, each class must be designated, along with a description of the preferences, limitations, and relative rights of each class); The name and address of each of the incorporators; The Utah street address of the corporation s initial registered office and the name of its initial registered agent at such address; and The signature of each of the incorporators. 1 Immediately before or after formation, Utah corporations often adopt bylaws to supplement the articles of incorporation by defining more precisely the powers, rights, and responsibilities of the corporation, its board of directors, and its shareholders and by stating other rules under which the corporation and its activities will be governed. Utah law, however, does not require a corporation to adopt bylaws. 2 If bylaws are adopted, they will usually state the authority of the officers and the directors, specifying what they may do and may not do; the time and place at which the annual shareholders meetings will be held; the procedure for calling special meetings of shareholders; and the procedures for shareholders and directors meetings. The bylaws also may make provisions for special committees of the board of directors, defining their membership and the scope 1 Utah Code Annotated, s 16-10a-202(1). 2 Utah Code Annotated, s 16-10a-206. If bylaws are not adopted, or if issues relating to the activities of the corporation are not addressed in the articles or the bylaws, the provisions of the Utah Revised Business Corporation Act will govern the activities of the corporation.

5 UTAH UT-3 of their activities. The bylaws also set up the required procedures for the transfer of shares, the maintenance of share records, and for the declaration and payment of dividends. 3 Shareholders Meeting Utah law requires that a corporation hold a meeting of shareholders annually at a time stated in or fixed in accordance with the corporation s bylaws. The shareholders meeting may be held in or out of the State of Utah at a place stated in or fixed in accordance with the bylaws. If no place is stated in or fixed in accordance with the bylaws, annual meetings of a corporation must be held at the corporation s principal office. Failure to hold an annual meeting at the time stated in or fixed in accordance with a corporation s bylaws, however, does not affect the validity of any corporate action or work a forfeiture or dissolution of the corporation. 4 Utah law also permits a special meeting of the shareholders to be held upon the call of the corporation s board of directors or by a person or persons authorized by the bylaws to call a special meeting. A meeting also may be convened if the holders of shares representing at least 10 per cent of all the votes entitled to be cast on any issue to be considered at the proposed special meeting sign, date, and deliver to the corporation s secretary one or more written demands for the meeting, stating the purpose or purposes for which it is to be held. As with annual shareholders meetings, special meetings of the shareholders may be held in or out of the State of Utah at the place stated in or fixed in accordance with the bylaws of the corporation. If no such place is stated or fixed, however, Utah law requires that special meetings be held at the principal office of the corporation. 5 Notice must be given to a corporation s shareholders of the date, time, and place of each annual and special shareholders meeting. The notice must be given no fewer than 10 days and no more than 60 days before the date of the meeting. 6 While notices of annual shareholders meetings do not require a description of the purpose or purposes for which the meeting is called, notices of special shareholders meeting are required to include such a description. 7 Utah law permits any action that may be taken at an annual or special meeting of shareholders to be taken without a meeting and without prior notice, provided that one or more written consents setting forth the action so taken are signed by the holders of outstanding shares with at least the minimum number of votes that 3 Utah Code Annotated, s 16-10a Utah Code Annotated, s 16-10a Utah Code Annotated, s 16-10a Utah Code Annotated, s 16-10a-705(1). 7 Utah Code Annotated, s 16-10a-705(2) and (3).

6 UT-4 LEGAL ASPECTS OF DOING BUSINESS IN NORTH AMERICA would be necessary to authorize or take the action at a meeting at which all shares entitled to vote on the action were present and voted. 8 Board of Directors In General. Utah corporations must generally have a board of directors, with members of the board of directors commonly being elected at each annual meeting of the shareholders. 9 The board of directors is the unit ultimately responsible for managing the business and affairs of the corporation. Composition. A board of directors is generally required to consist of at least three individuals; however, before any shares of the stock corporation are issued, a corporation s board of directors may consist of only one individual. Additionally, after shares of a corporation are issued, the board of directors may consist of a number of individuals equal to or greater than the number of shareholders of the corporation. Thus, for example, if there are only two holders of a corporation s shares, the corporation is permitted to have only two directors. 10 The only requirement Utah law places on those who may be elected as directors is that a director must be a natural person. While a corporation s articles of incorporation or bylaws may prescribe further qualifications that a director must meet, further qualifications are not required. Unlike other jurisdictions, Utah law does not require that a director be a resident of the State of Utah or a shareholder of the corporation. 11 Function and Manner of Taking Actions. The duty of the directors of a corporation is to take actions to further the interests and business of the association and to conserve its property. 12 Such actions must be approved by a majority of directors present at board meetings, unless otherwise provided in the corporation s articles or bylaws. 13 No action can be taken, however, unless there is a quorum of directors present. 14 Utah law defines a quorum as a majority of 8 Utah Code Annotated, s 16-10a Utah Code Annotated, s 16-10a-801 (requiring that every corporation have a board of directors, except that a corporation with a shareholders agreement authorized by the Utah Revised Business Corporation Act may dispense with or limit the authority of the board of directors). 10 Utah Code Annotated, s 16-10a-803(1)(b). 11 Utah Code Annotated, s 16-10a Nicholson v Evans, 642 P.2d 727 (Utah 1982). If a corporation has a board of directors, all corporate powers must be exercised by, or under the authority of, and the business and affairs of the corporation managed under the direction of, the board of directors. Utah Code Annotated, s 16-10a-801(2). 13 Utah Code Annotated, s 16-10a-824(3). Although the Utah Revised Business Corporation Act does not prescribe in detail formal requirements for board meetings, the meetings do have to take place. 14 Utah Code Annotated, s 16-10a-824(1).

7 UTAH UT-5 directors, unless a greater number or lower number is set forth in the articles of incorporation or the bylaws. Under Utah law, in no event may a quorum be less than one-third of the directors of the corporation. 15 Fiduciary Duties In General. As defined by Utah law, directors have basic legal obligations or duties that arise from their ultimate responsibility for the business and interests of the corporation. The duties set both the general standards of conduct for a director to follow and also the reviewing standards for a court to use in determining whether a director s behavior has been proper in a particular circumstance. The most important duties required by Utah law are the duty of good faith, the duty of care, and the duty of loyalty. 16 Duty of Good Faith. The duty of good faith can be defined as a director s promise not to consciously abdicate his duties or intentionally do anything to injure the business or interests of the corporation or its shareholders. Utah law generally allows shareholders to sue for violation of this duty. For instance, the Utah Supreme Court has explained that it is well established precedent that the bylaws of a corporation, together with the articles of incorporation, the statute under which it was incorporated, and the [shareholder s] application, constitute a contract between the [shareholder] and the corporation, and that a covenant of good faith and fair dealing exists between [a corporation] and [its shareholders]. 17 With that said, however, a claim against individual directors is generally barred in Utah because a contract between a shareholder and a corporation is not a contract between a shareholder and the board of directors. 18 However, a director who acts in bad faith can become liable for a corporation s breach of contract. 19 Courts have attempted to define the duty of good faith in more detail. A Delaware court, in litigation over severance paid by The Walt Disney Company to its president, considered the meaning of the duty of good faith. The Chancellor of the court explained: Upon long and careful consideration, I am of the opinion that the concept of intentional dereliction of duty, a conscious disregard for one s responsibilities, is an appropriate (although not the only) standard for determining whether fiduciaries have acted in good faith. Deliberate indifference and inaction in the 15 Utah Code Annotated, s 16-10a-824(2). 16 Utah Code Annotated, s 16-10a-840(1). 17 Ute Indian Tribe of the Uintah & Ouray Reservation v Ute Distribution Corporation, 2012 U.S. App. LEXIS 245 (10th Cir. 5 Jan. 2012). 18 Ute Indian Tribe of the Uintah & Ouray Reservation v Ute Distribution Corporation, 2012 U.S. App. LEXIS 245, *41 42 (10th Cir. 5 Jan. 2012). 19 Ute Indian Tribe of the Uintah & Ouray Reservation v Ute Distribution Corporation, 2012 U.S. App. LEXIS 245, *42 (10th Cir. 5 Jan. 2012).

8 UT-6 LEGAL ASPECTS OF DOING BUSINESS IN NORTH AMERICA face of a duty to act is, in my mind, conduct that is clearly disloyal to the corporation. It is the epitome of faithless conduct. A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties. There may be other examples of bad faith yet to be proven or alleged, but these three are the most salient. 20 While not controlling law in Utah, the Delaware court s discussion of the duty of good faith in In re The Walt Disney Co. Derivative Litigation may be helpful in better understanding and delineating a director s duty of good faith toward a Utah corporation. Duty of Care. Utah law is different than most other jurisdictions in that directors are required to perform their duties in good faith, with the care of an ordinarily prudent person in a like position would exercise. 21 The reference to an ordinarily prudent person embodies long traditions of the common law, in contrast to suggested standards that might call for some undefined degree of expertise, such as ordinarily prudent businessman. The phrase recognizes the need for innovation, essential to profit orientation, and focuses on the basic attributes of common sense, practical wisdom, and informed judgment. And the phrase in a like position recognizes that the care under consideration is that which would be used by the ordinarily prudent person if he were a director of the particular corporation. The process by which a director becomes informed will vary, but the duty of care requires every director to take steps to become informed about the background facts and circumstances before taking action on the matter at hand. In relying upon the performance by management of delegated or assigned duties, a director may depend upon the presumption of regularity, absent knowledge or notice to the contrary. 22 A director also may rely on information, opinions, reports, and statements prepared or presented by others. 23 Furthermore, a director of a Utah corporation is not expected to anticipate the problems which the corporation may face, except in those circumstances where something has occurred to make it obvious to the director that the corporation should be addressing a particular problem. 20 In re The Walt Disney Co. Derivative Litigation, 907 A.2d 693, (Del. Ch. 2005). 21 Utah Code Annotated, s 16-10a-840(1). 22 Utah Code Annotated, s 16-10a Utah Code Annotated, s 16-10a-840(2). A director is permitted to rely upon outside advisers, including not only those in the professional disciplines customarily supervised by state authorities, such as lawyers, accountants, and engineers, but also those in other fields involving special experience and skills, such as investment bankers, geologists, management consultants, actuaries, and real estate appraisers.

9 UTAH UT-7 In satisfying their duty of care, directors are given wide discretion within which to act without fear of liability under the business judgment rule. 24 The business judgment rule recognizes that courts are ill-equipped to second-guess the validity of complex business decisions made by directors. As long as there is no gross negligence, willful misconduct, or intentional infliction of harm on the corporation, decisions made by directors are generally protected. Essentially, the business judgment rule recognizes that directors should be able to exercise their business judgment without fear of liability as long as they are exercising their judgment in good faith. The rule, however, has never been absolute and it has important exceptions. The business judgment rule does not apply in self-interested transactions where directors stand on both sides of a transaction or have a personal financial interest in a transaction. Also, the rule only applies when a judgment has been made. When courts say that they will not interfere in matters of business judgment, it is presupposed that judgment (i.e., reasonable diligence) has in fact been exercised. The rule does not apply where directors have either abdicated their function or, absent a conscious decision, failed to act. This exception exists because the rule was intended to give directors wide latitude in making business decisions, not to permit the abdication of their responsibilities. Finally, the business judgment rule does not apply where the directors have failed to act with the care required under Utah law. 25 Duty of Loyalty. Directors have a fiduciary duty of loyalty to their corporation and its shareholders. 26 They are obligated to use their ingenuity, influence, and energy, and to employ all the resources of the corporation to preserve and enhance the property and earning power of the corporation, even if the interests of the corporation are in conflict with their own personal interests. 27 This duty extends to all of the corporation s assets, including its subsidiary corporations. The Utah Supreme Court has held that: The duty of the directors of a corporation is to further the interests and business of the association and to conserve its property. Any action on the part of directors looking to the impairment of corporate rights, the sacrifice of corporate interests, the retardation of the objects of the corporation, and more especially the destruction of the corporation itself, will be regarded as a flagrant breach of trust on the part of the directors engaged therein The Utah legislature codified the business judgment rule in Utah Code Annotated, s 16-10a-840. C&Y Corp. v General Biometrics, Inc., 896 P.2d 47, 55 (Utah Ct. App. 1995). 25 Resolution Trust Corp. v Hess, 820 F. Supp. 1359, 1367 (Dist. Utah 1993) (discussing the fiduciary duties of directors in a trust corporation). 26 Nicholson v Evans, 642 P.2d 727, 730 (Utah 1982); Branch v Western Factors, Inc., 502 P.2d 570 (Utah 1972); Elggren v Woolley, 228 P. 906 (Utah 1924). 27 Nicholson v Evans, 642 P.2d 727, 730 (Utah 1982). 28 Glen Allen Mining Co. v Park Galena Mining Co, 296 P. 231 (Utah 1931).

10 UT-8 LEGAL ASPECTS OF DOING BUSINESS IN NORTH AMERICA Pursuant to this fiduciary duty of loyalty, the so-called corporate opportunity doctrine forbids a corporate director from acquiring for his own benefit an opportunity that would have been valuable and germane to the corporation s business, unless that opportunity is first offered to the corporation and declined by a disinterested board of directors or disinterested shareholders or, where that is not possible, the transaction is judged according to the circumstances at the time of the transaction as fair to the corporation. 29 This duty applies to whatever could be of value to the enterprise to which the fiduciary owes a duty. Utah law provides for a detailed procedure the board of directors should follow in approving any transaction in which any director has an interest. 30 Liability and Indemnification In General. Utah law permits both voluntary and mandatory indemnification of directors. Voluntary indemnification is addressed in Section 902 of the Utah Revised Business Corporation Act, while mandatory indemnification is addressed in Section 903. Voluntary Indemnification. The Utah Revised Business Corporation Act sets the outer limits for which voluntary indemnification is permitted. Conduct that does not meet the explicit standards set forth in the Utah Revised Business Corporation Act is not eligible for voluntary indemnification. Specifically, a corporation may indemnify an individual made a party to a proceeding because such individual is or was a director if that individual s conduct was in good faith, if the individual reasonably believed that his conduct was in (or not opposed to) the corporation s best interests, and, in the case of any criminal proceeding, that he had no reasonable cause to believe that his conduct was unlawful. 31 However, a corporation may not voluntarily indemnify a director in connection with a proceeding by (or on behalf of) the corporation in which the director was adjudged liable to the corporation. A corporation also is prohibited from voluntarily indemnifying a director in connection with any other proceeding alleging the director derived an improper personal benefit (whether or not involving action in his official capacity) and in which proceeding the director was adjudged liable on the basis that he derived an improper personal benefit. 32 Mandatory Indemnification. Utah law also addresses certain situations in which a corporation must indemnify its directors. The basic standard for 29 Utah Code Annotated, s 16-10a-850(1); Nicholson v Evans, 642 P.2d 727, (Utah 1982) ( To avoid the distortion of self-interest, a director who desires to acquire a corporate opportunity for his own benefit should make full disclosure and submit any questions of fact, such as the corporation s interest or financial or legal ability, to the impartial judgment of others. ). 30 Utah Code Annotated, s 16-10a Utah Code Annotated, s 16-10a-902(1). 32 Utah Code Annotated, s 16-10a-902(4).

11 UTAH UT-9 mandatory indemnification is that the director has been successful, on the merits or otherwise, in the defense of any proceeding, or in the defense of any claim, issue, or matter in the proceeding Thus, Utah law preserves a director s right to indemnification against expense and fees incurred in connection with the successful defense of any claim, issue, or matter in any proceeding to which the director was a party by reason of being a director of the corporation. 34 Utah law also permits court-ordered indemnification in two situations. First, a director entitled to mandatory indemnification may enforce that entitlement by a judicial proceeding. Second, a director who claims to be fairly and reasonably entitled to indemnification in view of all the circumstances may request the court to order appropriate indemnification. In either case, the court must satisfy itself that the person seeking indemnification is properly entitled to it. A corporation may limit a director s right to request court-ordered indemnification by a provision prohibiting it in the corporation s articles of incorporation. In the absence of such a provision, however, the court has general power to grant indemnification. 35 Limited-Liability Companies In General A limited-liability company is a newer form of business entity that combines the operational flexibility and tax status of a general partnership with the limited liability protection traditionally associated with corporations. A limited liability company has far greater operational flexibility than either a corporation or a limited partnership. Chapter 2c of Title 48 of the Utah Code Annotated, referred to as the Utah Revised Limited Liability Company Act, governs all issues concerning limited liability companies in Utah. 36 Utah s Revised Limited Liability Company Act was recently replaced in its entirety by a modified version during the 2011 General Session of the Utah legislature. The new Utah Revised Uniform Limited Liability Company Act affects the formation and regulation of limited liability companies in the State of Utah and is expected to take effect on 1 July All new limited liability companies that are formed on or after 1 July 2012 will be subject to these new regulations, while existing limited liability companies will not be affected until 1 January However, existing limited liability companies may choose to opt into the new regulations any time before At the time of writing, the Utah Revised Limited Liability Company Act is in force, and this discussion is based on that law. 33 Utah Code Annotated, s 16-10a Utah Code Annotated, s 16-10a Utah Code Annotated, s 16-10a The Utah Revised Limited Liability Company Act is located at Utah Code Annotated, ss 48-2c-101 et seq.

12 UT-10 LEGAL ASPECTS OF DOING BUSINESS IN NORTH AMERICA Formation A limited liability company is only created by permission of the State of Utah by filing articles of organization with the Utah Department of Commerce, Division of Corporations and Commercial Code. At a minimum, the articles of incorporation must include: The name of the limited liability company; The purpose or purposes for which the limited liability company is formed; The name and address of the initial registered agent of the limited liability company; The name and street address of each organizer who is not a member or manager; If the limited liability company is to be manager-managed, a statement that the company is to be managed by a manager or managers and the names and street addresses of the managers who are to serve; and If the limited liability company is to be member-managed, a statement that the company is to be managed by its members and the names and street addresses of the members who are to serve. 37 Immediately before or after formation, Utah limited liability companies often adopt operating agreements to supplement the articles of organization by more precisely defining the management of the company, the business or purpose of the company, the conduct of the company s affairs or the rights, duties, powers, and qualifications of and relations between and among the members, the managers, the members assignees and transferees, and the limited liability company. 38 Utah law, however, does not require a limited liability company to adopt an operating agreement. Management A Utah limited liability company may be managed by its members or the members may choose managers to manage the operations of the company. Managers may consist of members, non-members, or a combination of both. Utah law does not require limited liability companies to hold annual meetings or to comply with the many operational restrictions imposed upon corporations. However, if meetings of members are allowed or required under the articles of organization or operating agreement, then, unless otherwise provided in the articles of organization or operating agreement, a meeting of members may be called by any manager in a manager-managed limited liability company or by members in any limited liability company that hold at least 25 per cent interest 37 Utah Code Annotated, s 48-2c Utah Code Annotated, s 48-2c-502.

13 UTAH UT-11 in profits of the company. Any business may be transacted at any meeting of members which is properly called. Notice of a meeting of members must be given to each member at least five days prior to the meeting and must give the date, place, and time of the meeting. Notice of a meeting of members may be given orally or in writing or by electronic means. The person calling the meeting may designate any place within or without the State of Utah as the place for the meeting. Only persons who are members of record at the time notice of a meeting is given are entitled to receive notice or to vote at the meeting. However, a fiduciary such as a trustee, personal representative, or guardian will be entitled to act in such capacity on behalf of a member of record if evidence of such status is presented to the limited liability company. A surviving joint tenant also will be entitled to receive notice and act when evidence of the other joint tenant s death is presented to the limited liability company. A quorum, consisting of members holding at least 51 per cent interest in the profits of the limited liability company, must be present in person or by proxy at a meeting of members for any business to be transacted. The members present at any meeting at which a quorum is present may continue to transact business notwithstanding the withdrawal of members from the meeting in such numbers that less than a quorum remains. A member may participate in and be considered present at a meeting by (or the meeting may be conducted through the use of) any means of communication by which all persons participating in the meeting may hear each other or otherwise communicate with each other during the meeting. Voting at a meeting will be determined by percentage interests in the profits of the limited liability company. To be effective, a proxy must be in writing and signed by the member and must be filed with the secretary of the meeting before or at the time of the meeting and will be valid for no more than 11 months after it was signed, unless otherwise provided in the proxy. 39 Fiduciary Duties Utah law specifies a default standard with respect to the standard of care and degree of loyalty imposed upon members and managers of a limited liability company. That general standard is that neither a member nor a manager is liable or accountable in damages or otherwise to a limited liability or the members for any action taken of failure to act on behalf of the [limited liability] company unless the act or omission constitutes gross negligence [or] willful misconduct. 40 However, if a higher standard of conduct is established in the limited liability company s articles of organization or operating agreement, a 39 Utah Code Annotated, s 48-2c Utah Code Annotated, s 48-2c-807; P.C. Regehr, Utah Limited Liability Company Forms and Practice Manual (Data Trace Publishing Company, 2008), at p

14 UT-12 LEGAL ASPECTS OF DOING BUSINESS IN NORTH AMERICA member or manager will be held to that higher standard. 41 Notwithstanding the general standard, with regard to conflict of interest or self-dealing transactions, the default rule is that: (2) Each member and manager shall account to the [limited liability] company and hold as trustee for it any profit or benefit derived by that person without the consent of members holding a majority interest in profits in the [limited liability] company, or a higher percentage of interests in profits provided for in the [limited liability] company s articles of organization or operating agreement, from: (a) any transaction connected with the conduct of the [limited liability] company s business or winding up of the [limited liability] company; or (b) any use by the member or manager of company property, including confidential or proprietary information of the [limited liability] company or other matters entrusted to the person in the capacity of a member or manager. 42 Utah s common law principles of agency and fiduciary duties also will apply to those who act on behalf of a limited liability company, but such principles do not establish the precise nature and extent of duties in all cases where agency authority exists. 43 Therefore, it is proper and good practice for a Utah limited liability company s operating agreement to define and set forth the duty and standard of care imposed on managers and members in various circumstances. 44 For example, if a limited liability company is managed by its managers, the operating agreement should specify whether the managers have the duty of care specified in the Utah Revised Limited Liability Company Act or, alternatively, the same standard of care and duty of loyalty as directors of a corporation or the standard of care and duty of loyalty of general partners of a partnership. 45 Liability and Indemnification In General. Utah permits the discretionary and mandatory indemnification of members and managers in a limited liability company. 46 Indemnification, however, can be limited in the articles of organization. If such a provision is 41 Utah Code Annotated, s 48-2c-807(1)(c). 42 Utah Code Annotated, s 48-2c P.C. Regehr, Utah Limited Liability Company Forms and Practice Manual (Data Trace Publishing Company, 2008), at p P.C. Regehr, Utah Limited Liability Company Forms and Practice Manual (Data Trace Publishing Company, 2008), at pp P.C. Regehr, Utah Limited Liability Company Forms and Practice Manual (Data Trace Publishing Company, 2008), at p Utah Code Annotated, ss 48-2c-1801 and 48-2c-1809.

15 UTAH UT-13 located in the articles of organization, then such a limitation cannot be overridden by the operating agreement, a resolution, or a contract. 47 Discretionary Indemnification. Utah law permits a limited liability company to indemnify an individual made a party to a proceeding because that individual is or was a manager against liability incurred in the proceeding if the individual s conduct was in good faith; the individual reasonably believed that his conduct was in the company s best interest or not opposed to the company s best interest; and, in the case of any criminal proceeding, the individual had no reasonable cause to believe that his conduct was unlawful. 48 However, a limited liability company is not permitted to use its discretion to indemnify a manager in connection with a proceeding by (or on behalf of) the limited liability company in which the manager was adjudged liable to the limited liability company. 49 Additionally, a limited liability company may not indemnify a manager in connection with any proceeding charging that the manager derived an improper personal benefit, whether or not involving action in his official capacity as a manager of the limited liability company, in which proceeding the manager was adjudged liable on the basis that he derived an improper personal benefit. 50 Discretionary indemnification is not permitted, unless the indemnification is authorized by the limited liability company and a determination has been made that indemnification of the manager is permissible under Utah law. 51 The required determination must be made in one of three ways: By the managers through a majority vote (only by those managers not a party to the proceeding will be counted); By special legal counsel selected by a majority vote of the managers of the company who are not parties to the proceeding or, if there is no legal counsel, by members holding a majority interest in the profits of the company, not counting any interest held by the manager who is a party to the proceeding; or By the members holding more than 50 per cent interest in the profits of the limited liability company, not counting any interest held by the manager who is a party to the proceeding. 52 Authorizations are handled in a different manner. Particularly, [u]nless authorization is required by the operating agreement, authorization of indemnification... shall be made in the same manner as the determination that indemnification... is permissible. However, if the determination that 47 Utah Code Annotated, s 48-2c-1809(1). 48 Utah Code Annotated, s 48-2c-1802(1). 49 Utah Code Annotated, s 48-2c-1802(4)(a). 50 Utah Code Annotated, s 48-2c-1802(4)(b). 51 Utah Code Annotated, s 48-2c Utah Code Annotated, s 48-2c-1806(2).

16 UT-14 LEGAL ASPECTS OF DOING BUSINESS IN NORTH AMERICA indemnification... is permissible is made by special legal counsel, authorization of indemnification... shall be made by those entitled... to select legal counsel. 53 Members of a limited liability company may be indemnified by the company to the same extent as a manager. 54 Utah law also permits a limited liability company to indemnify a member who is not a manager to a greater extent than permitted for an individual who is solely a manager, as long as such indemnification is not inconsistent with public policy and if provided for by its articles of organization, operating agreement, general or specific action of its managers or members, or contract. 55 Mandatory Indemnification. Utah law also requires that a manager or member that is successful, on the merits or otherwise, in the defense of any proceeding or in the defense of any claim, issue, or matter in the proceeding to which such member or manager was a party, must have mandatory indemnification against reasonable expenses incurred by the manager or member in connection with the proceeding or claim. 56 Utah courts also have limited authority to enforce mandatory indemnification. A member or manager successful in a proceeding may apply to a court, to another decision maker conducting the proceeding, or to another court of competent jurisdiction for indemnification by the limited liability company. 57 Upon reviewing the application, a court may order indemnification. 58 Acquisition of Enterprises Forms of Acquisition There are three principal ways to acquire a business in Utah. Specifically, businesses may be acquired through an asset acquisition, an equity acquisition, and a merger. Asset and Equity Acquisitions In an asset acquisition, the buyer acquires specific assets and liabilities of the target company as listed in the asset purchase agreement, which is the contract that governs the purchasing of the specific assets and liabilities. After the deal closes, the buyer and seller maintain their corporate structures and the seller retains those assets and liabilities not purchased by the buyer. In equity 53 Utah Code Annotated, s 48-2c-1806(3). 54 Utah Code Annotated, s 48-2c-1807(2). 55 Utah Code Annotated, s 48-2c-1807(3). 56 Utah Code Annotated, ss 48-2c-1803 and 48-2c P. C. Regehr, Utah Limited Liability Company Forms and Practice Manual (Data Trace Publishing Company, 2008), at p Utah Code Annotated, s 48-2c-1805.

17 UTAH UT-15 acquisitions, the buyer acquires the target company s equity (e.g., stock, units, partnership interests, and the like) from the selling equity holders. The buyer acquires all of the target company s assets, rights, and liabilities. Following the transaction, the target company maintains its corporate existence and becomes a subsidiary of the buyer. Mergers In General A merger is an equity acquisition in which two companies combine into one legal entity. The surviving entity assumes all the assets, rights, and liabilities of the extinguished entity. The merger process is governed by laws of the states of formation of the parties to the merger. The principal categories of mergers are direct mergers and indirect mergers. Direct mergers are typically structured as forward mergers (they also can be structured as reverse mergers so that the target company survives, but this is not common). Indirect mergers are structured as forward triangular mergers or reverse triangular mergers and are often used by buyers to shield themselves from the target company s liabilities. Permitted Merger Structures In General. Utah law does not prohibit direct or indirect mergers. The most common merger structures, however, are the forward merger, the forward triangular merger, and the reverse triangular merger, which are discussed in turn. Forward Merger. In a forward merger, the target company merges with and into the buyer, the buyer assumes all of the target company s assets, rights, and liabilities by operation of law, and the target company ceases to exist as a separate entity. Figure 1 represents a forward merger.

18 UT-16 LEGAL ASPECTS OF DOING BUSINESS IN NORTH AMERICA Figure 1: Forward merger. Forward Triangular Merger. A forward triangular merger is an indirect merger where the buyer uses a merger subsidiary (which can be an existing or newly formed subsidiary) to acquire the target company. The target company merges with and into the merger subsidiary, the merger subsidiary assumes all of the target company s assets, rights, and liabilities by operation of law, and the separate existence of the target company is extinguished. Figure 2 represents a typical forward triangular merger.

19 UTAH UT-17 Figure 2: Forward triangular merger. Reverse Triangular Merger. In a reverse triangular merger (also an indirect merger), the buyer s merger subsidiary is merged with and into the target company and the target company survives the merger and becomes the buyer s subsidiary. The principal advantage to this structure is that it typically does not require third-party consents, as the target company is the surviving entity (unless the relevant agreements contain change-of-control provisions). Figure 3 represents a typical reverse triangular merger.

20 UT-18 LEGAL ASPECTS OF DOING BUSINESS IN NORTH AMERICA Figure 3: Reverse triangular merger. Utah Law on Merger of Corporations Like most states, Utah law authorizes a statutory merger, to be accomplished by the adoption of a plan of merger and, if required, approval by the shareholders of the corporation. 59 To accomplish the merger, articles of merger must be filed with the Utah Department of Commerce, Division of Corporations and Commercial Code. The articles of merger formally make the terms of the transaction a matter of public record, and the effective date of the articles is the effective date of their filing, unless a delayed effective date is utilized. The articles of merger must describe whether the plan was submitted to the vote of one or more voting groups of the participating corporations entitled to vote separately on the plan. If the plan was submitted, the articles of merger must state either the total votes in favor of and against the plan or a statement that the plan was approved by at least the number of undisputed votes required to approve the merger or share exchange by each voting group of each participating corporation entitled to vote separately on the plan. 60 On the effective date of merger, the surviving corporation becomes vested with all the assets of the disappearing corporations and becomes subject to their liabilities. Under Utah law, there are virtually no restrictions or limitations on the terms of a statutory merger. Shareholders of the disappearing corporations may receive securities of the surviving corporation, securities of a third corporation (e.g., 59 Utah Code Annotated, s 16-10a-1101(1). Adoption of a plan of merger must be pursuant to Utah Code Annotated, s 16-10a-1101(2). Shareholder approval is not always required. 60 Utah Code Annotated, s 16-10a-1105.

21 UTAH UT-19 shares issued by the parent of the surviving or disappearing corporation), or cash or other property. Some of the holders of a single class of shares may be required to accept securities or properties, while the remaining holders may be compelled to accept different securities, property, or cash. 61 The capitalization of the surviving corporation may be restructured in the merger or its articles of incorporation may be amended by the articles of merger in any way deemed appropriate. Any other provisions considered necessary or desirable with respect to the merger may be included in the plan of merger. On the effective date of merger, every disappearing corporation that is a party to the merger disappears into the surviving corporation and the surviving corporation automatically becomes the owner of all real and personal property and becomes subject to all the liabilities, actual or contingent, of each disappearing corporation. Additionally, all pending litigation is continued. 62 Utah Law on Merger of Limited Liability Companies As with corporations, Utah law permits any entity to convert to a Utah limited liability company upon receiving approval of the conversion as set forth in applicable law or by the document, instrument, agreement, or other writing that governs the internal affairs of the converting entity, 63 and by filing articles of conversion and articles of organization that satisfy the requirements of the Utah Revised Limited Liability Company Act. 64 As with corporations, Utah law permits that one or more limited liability companies may merge with one or more other entities, if each company and entity that is a party to the merger approves a plan of merger and if the merger is permitted by the various state statutes governing each entity. The entity that survives may be a limited liability company or other entity. 65 The plan of merger must set forth the name and type of each entity planning to merge; the name and type of the entity that will survive; the terms and conditions of the merger; and the manner and basis of converting the ownership interests of each owner into ownership interests or obligations of the surviving entity or any other entity, or into cash or other property in whole or in part. 61 If any shareholders of any party to the merger are to receive different shares or money or property under the plan of merger, the rights of those shareholders after the articles of merger are filed are limited to their rights under the plan of merger or their rights under the Utah Revised Business Corporation Act, Part 13. Utah Code Annotated, s 16-10a-1106(1)(f). 62 Utah Code Annotated, s 16-10a-1106(1). 63 Utah Code Annotated, s 48-2c However, if applicable law or the document, instrument, agreement, or other writing that governs the internal affairs of the entity desiring to convert to a limited liability company does not provide for the manner of approving the conversion, the unanimous consent of the owners of the converting entity is required to approve the conversion and the new operating agreement. 64 Utah Code Annotated, s 48-2c Utah Code Annotated, s 48-2c-1407(1).

22 UT-20 LEGAL ASPECTS OF DOING BUSINESS IN NORTH AMERICA Moreover, if any party to the merger is an entity other than a limited liability company, any additional information required for a merger by the statutes governing that entity must be included in the plan of merger. 66 Additionally, the plan of merger may set forth amendments to the articles of organization of a limited liability company (if that company is the surviving entity) and any other provisions relating to the merger. 67 Dissenters Rights Under Utah law, a shareholder is entitled to dissent from and obtain payment of the fair value of shares held by him in the event of the consummation of a plan of merger to which the corporation is a party, or the consummation of an exchange of shares, or the sale of substantially all of the property of the corporation in an asset sale. 68 Fair value is to be determined immediately before the effectuation of the corporate action instead of the day prior to the date of the shareholder vote, as is the case with most other state statutes that address the issue. The use of this day preserves a dissenter s prior rights as a shareholder until the effective date of the corporation action, rather than leaving the dissenter in a zone where former rights have been lost but new ones have not yet been attained. Ultimately, Utah corporate law does not address the definition of fair value, but leaves to the parties (and to the courts) the details by which fair value is to be determined within the broad outlines of the definition. A shareholder s ability to dissent and obtain payment for his shares is the exclusive remedy for that shareholder, unless the transaction is unlawful or fraudulent. 69 Utah basically adopts the New York formula as to exclusivity of the dissenters remedy. The theory underlying the exclusive nature of the remedy is that when a majority of shareholders has approved a corporate change, the corporation should be permitted to proceed even if a minority considers the change unwise or disadvantageous and persuades a court that this is correct. As dissenting shareholders can obtain the fair value of their shares, they are protected from pecuniary loss. Thus, in general terms, an exclusivity principle is justified. However, the prospect that a shareholder may be paid off does not justify a corporation proceeding in an action unlawfully or fraudulently. If the corporation attempts an action in violation of the corporation law on voting, in violation of clauses in the articles of incorporation prohibiting it, by deception of shareholders, or in violation of a fiduciary duty, the court s freedom to intervene should be unaffected by the presence or absence of dissenters rights under Utah law Utah Code Annotated, s 48-2c-1407(2). 67 Utah Code Annotated, s 48-2c-1407(3). 68 Utah Code Annotated, s 16-10a-1302(1). 69 Utah Code Annotated, s 16-10a-1302(5). 70 Commentary to the Utah Revised Business Corporation Act, s 1302.